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TCJA Part 2: Changes to Standard and Itemized Deductions

Tax Planning

This is the second blog in a series that explains the changes made to tax law under the Tax Cuts and Jobs Act (TCJA). Check out the first post here.

The following will discuss the major changes to the standard and itemized deductions. For reference, all tax returns are entitled to the higher of a standard deduction or itemized deduction. While some taxpayers will see no impact, there are many that will see a tremendous impact on their ability to deduct items such as state taxes paid, unreimbursed work expenses, and even investment advisory fees.  

The TCJA doesn’t impact the way that itemized deductions function; rather it changes the number of taxpayers that will itemize. Under the previous tax law (the one that you are filing your 2017 tax returns under), a single taxpayer can employ the higher of a standard deduction ($6,350) or total itemized deductions (more on these later). The standard or itemized deductions reduce taxable income, providing significant benefits to items such as owning a home, donating to charity, or grouping medical expenses. Along with the standard or itemized deduction, a single taxpayer also benefits from a personal exemption ($4,050) which further reduces taxable income. Under the TCJA, personal exemptions have been fully repealed and have been replaced with a higher standard deduction. The standard deductions have nearly doubled, increasing for single filers from $6,350 for tax year 2017 to $12,000 for 2018. While this may seem like a good deal, it may not be for those who have significant itemized deductions. While I used a single taxpayer as an example, you can see the changes to all filing types here.  Speaking of itemized deductions, let’s get to those changes! 

For tax year 2017, taxpayers that itemize can write-off the larger of either A) state and local taxes paid during the year or B) sales taxes allowable. I won’t go into the how the sales tax is calculated, but just know that there is a standard table that the IRS uses to calculate the allowable sales tax deduction. There is currently no ceiling on the deduction other than limiting factors such as AMT (Alternative Minimum Tax). The state and local tax deduction consists of state tax withholding, property taxes, Ad Valorem taxes, as well as other state and local taxes. For many taxpayers this amount can be quite large.  This is especially true for those in what are considered high tax states. Under the TCJA, the allowable itemized deduction for state and local taxes paid (or sales taxes paid) is capped at $10,000. For many, this will be highly impactful to itemized deductions, resulting in what would be a potentially large decrease in their yearly deductions.  

Are you thinking of buying a home with a jumbo loan of more than $750,000? If so, the TCJA limits the amount of mortgage interest that can be included in your itemized deductions. This means that the amount of interest allocable to the loan amount over $750,000 is not tax deductible. Under the current law the loan interest is limited to $1,000,000.  A change that is likely to impact more tax payers is the inability to itemize interest on a line of credit. If you are reading this and considering calling your mortgage broker in hopes of consolidating your loans – hold off on that for now. Since the TCJA does not change the definition of what a home loan is, your line of credit could still be deductible. The IRS will continue to allow interest on a loan, even a line of credit, if the funds are used as acquisition debt. I won’t get too technical, but just know that if you use a line of credit to either purchase or improve your home, then the interest is still deductible.  

The last major change to itemized deductions deals with what is labeled “Other Itemized Deductions.” While there are many items that make up Other Itemized Deductions, the large portion of these deductions include unreimbursed employee expenses, investment advisory fees, tax preparation fees, and work-related education expenses. Since this group of itemized deductions can be expansive, a follow-up to this blog will be released soon. The main point you should know is that the TCJA has repealed other itemized deductions in their entirety. 

In closing, the standard deduction and itemized deductions have been altered in a way that could have a significant impact on taxpayers. As always, you should evaluate your tax return or speak to your tax professional to see if any of these changes could have a negative impact on you.